Given the current financial crisis, there is renewed interest in modelling how the price of commodities change in the market. Traditionally, such models have assumed constant parameters. However, large and sudden changes in the parameters can also be anticipated due to market shocks. This paper is aimed at addressing this issue. We first describe a bias-variance trade-off in parameter estimation when sudden changes are considered. We then propose a mechanism to achieve a compromise between the observed bias and variance. A key ingredient of this mechanism is to use an estimator having a variable memory length.

Relation

48th IEEE Conference on Decision and Control, 2009 held jointly with the 28th Chinese Control Conference, 2009 (CDC/CCC 2009). Proceedings of the 48th IEEE Conference on Decision and Control 2009, held jointly with the 28th Chinese Control Conference 2009, CDC/CCC 2009 (Shanghai, China 15-18 December, 2009) p. 1563-1568